Case Study: How an Accountant From Tennessee Acquired 63 Multifamily Investment Properties in 5 Years

By Susan Lassiter-Lyons | Real Estate

This is Part 1 of a 3-part series on how to control AND profit from commercial investment property with a Master Lease Option

Part 1 – [You Are Here] – Case Study: How an Accountant From Tennessee Acquired 63 Multifamily Investment Properties in 5 Years

Part 2 – How to Find Motivated Sellers and Get Them to Agree to Master Lease Options

Part 3 – 10 Ways to Increase the Value of Any Commercial Property in 30 Days or Less

Here's a question for you…

What if you could pocket $50 per month per door on commercial investment properties you don’t even own?

Yes, I said on ones that you don’t even own!

Not only is it possible, but I’ve been using and teaching this creative investing strategy since 2008.

Let’s face it.

To most, the thought of investing in commercial properties like apartment buildings, office buildings, self-storage and mobile home parks is… daunting.

To say the least.

I personally like investing in commercial – specifically multifamily – because of vacancies and cash flow.

If I own (or control) a single-family property and the tenant moves out, I have 100% vacancy and 0% of the cash flow coming in.

If I own (or control) a 10-unit apartment building and a tenant moves out, I have only 10% vacancy and 90% of the cash flow still coming in.

This was the whole reason I made the move to multifamily (commercial) from single-family (residential) back in the day.

TIP: Most newbie investors I work with are under the mistaken impression that you have to start out as a residential investor and work your way up to commercial.

Not true.

Using my Master Lease Option Method, it is not only possible but so simple to “invest” in commercial property with no cash, credit, risk or previous experience.

No joke.

Now, I’m going to introduce you to a friend of mine in just a sec who started out as a residential lease option investor, came to me to learn master lease option investing and after 5 years has acquired 63 apartment buildings using this method.

Yes, 63!

But first, I want to explain more about the strategy itself.

Making money with the Master Lease Option Method is simple, in fact here’s step-by-step exactly how it works…

The Master Lease Option Process

1) First, you get a master lease and option agreement in place.

This means you become the “master tenant” of the property and are in charge of the operation and you have the right (but not the obligation) to purchase the property at a pre-agreed price at some point in the future.

2) Next, you raise rent or bill back utilities to the tenants…

3) Then, YOU collect the spread and pocket the increase in equity when you exercise your option…

mlom

Master Lease Options give you the FREEDOM to control a property (without owning it), get a property manger to run everything, increase the value of a property…

…and pocket the difference as 100% profit.

How Come I've Never Heard of a Master Lease Option?

Master lease options are not a new thing.

Or some obscure shenanigan that no one has ever heard of that doesn’t work in the real world.

In fact, one of the most famous buildings in the world has a master lease option.

Recognize this building?

esb

It’s the EMPIRE STATE BUILDING in New York City, baby!

And this building has a master lease option in place.

Not only, has it got a master lease option in place, it’s been in place for more than 100 years!

The Empire State Building Master Lease

The original owner of the Empire State Building, Col. Henry Crown, originally agreed to sell the land to the Prudential Insurance Company and lease back the building.

When Empire State Building Associates came into the picture in 1961, it negotiated a new lease with Prudential running 114 years on both land and building.

It paid Prudential a return of about 5 percent on an investment of $46 million. The lease provided renewal options after 30 years and four 21-year periods thereafter.

The Lease and Sublease

The annual rent payable by to the building owner under the Lease is $1,970,000 from January 5, 1992 through January 5, 2013 and $1,723,750 annually during the term of each renewal period thereafter.

The annual gross rent is $6,018,750 from January 1, 1992 through January 4, 2013, and $5,895,625 from January 5, 2013 through the expiration of all renewal terms.

So, the spread in this case which is the difference between what has been agreed to be paid to the owner and what the master lessee collects is more than $4,000,000.

Pure profit.

No wonder Donald Trump has been trying to get control of the master lease for years. (He's moved on to a new project as of late.) 🙂

By the way, the Empire State Building appraised for $2.5 billion in 2012.

The point is that Master Lease Options are real.

And they have been around a long time.

And they aren’t going anywhere anytime soon.

And they are profitable.

And they are perfectly legal.

And they work on any commercial building that has tenants.

Even the Empire State Building.

Chances are you’re not going to cut your teeth on master lease options on one of the most famous buildings in the world valued at $2.5 billion dollars.

So, let's get down to brass tacks. (Brass tacks? What does that even mean?)

FREE VIDEO- Here's How To Control Properties

Show Me the Money

Let’s run some hypothetical numbers on a 15-unit apartment building.

Current Annual Income: $100,000
Current Annual Expenses: $45,000
Current Net Operating Income: $55,000

You come in and increase the income by 20% (using methods I’ll tell you about later in this blog series) and…

New Annual Income: $120,000
New Annual Expenses: $45,000
New Net Operating Income: $75,000

That’s a difference (or spread) of $20,000 a year.

And that goes IN YOUR POCKET as the “master tenant.”

That's Cash. What About Equity?

The cool thing about commercial properties (unlike residential) is that their VALUE is tied directly to their INCOME.

So any increase in income has an exponential increase in value.

Same example…

Let’s say the market capitalization (CAP rate) is 8%.

We can easily determine the value of the property using this simple formula:

Property Value = Net Operating Income/ Capitalization Rate

So, before you worked your magic, the value was…

$55,000/8% = $687,500

And let’s say that’s what your option to purchase price is.

But after you worked your magic, the value has increased…

$75,000/8% = $937,500

What the what?!

You have just increased the EQUITY on the property by $250,000!

So, one relatively small apartment deal – say 15 units – has NETTED you $20,000 a year profit and $250,000 in equity.

Sound good?

Well, what if you did that 63 times in 5 years?

Meet Bill Walston

bill

Yes, he’s a real person.

I met Bill back in 2010 when he bought my Master Lease Option Method program and he emailed in a few questions.

I heard through the grapevine that he was having success with the method, so I reached out to him to chat.

He says that I literally said, “Who are you and what are you doing?”

I feel like I was probably a little nicer than that. But, you never know.

Bill and I got to know each other well and now we’re good friends and business partners.

Bill was a CPA who was doing residential lease options but he wanted to transition to commercial investing for the same reasons that I did.

When most people find out Bill has done as many master lease options as he has they have one of two reactions…

1) Disbelief. They just flat out think he’s lying.
2) Curiosity. They want to know HOW he’s done it!

And the big secret is that there is no secret.

It’s just following (and dialing in) the simple systems and process that makes this strategy work.

And making LOTS of offers because at the end of the day real estate is a numbers game.

Bill lives in a small town in northeastern Tennessee and has closed deals in multiple areas of the country from his home office (and Starbuck’s).

He controls properties as big as 20 units and as small as 4 units and his goal on every deal is to make a minimum of $50 per door per month in the “spread.”

So, on a 10-unit that’s a minimum target of $500 a month in income to him.

Bill has all his properties professionally managed by property management companies so that for the most part, it’s a hands-free investment.

And as a result, he works less than 25 hours a week on his portfolio.

So, that’s Bill.

I have other students who are crushing it with this method now too. Including Sharon Collins who has master lease options on two MARINAS!

So as long as there are tenants in place paying something each month, this strategy will work and is an EXCELLENT and risk-free way to begin investing in commercial properties.

In Part 2 of this series, I’ll share some tips on finding motivated sellers for this strategy.

Leave me a comment with any questions and let me know what you think!

Leave a Comment:

(24) comments

Want to learn more.

Reply

Is this strategy just as relevant today as a couple of years ago? I ask because I realize the market is constantly changing and I don’t see a lot of recent comments

Reply
Juan

What is the cost to learn your program?

Reply
    Susan Lassiter-Lyons

    Juan, the Master Lease Option Method is only $197.

    Reply
Victor Akinola

How can I become one of your students?

Reply
Bill

Susan,
Great stuff. Do you usually have the owner continue to pay the mortgage, taxes and insurance, plus pay repair?
Bill

Reply
    Susan Lassiter-Lyons

    Since you’e the tenant and the owner still owns the building they are still responsible for that. We usually have the property management company take care of the actuals payments and then send the owner a check once a month for his cut of the NOI.

    Reply

      Who pays for evictions? If tenants default on their rent or need to be evicted, that obviously cuts into Bill’s monthly income, and could possibly even put Bill in the red. Does this happen and how do you guys handle this? I would love to pursue this strategy, but I’m just scared sh*tless about ending up owing money to the owner because tenants decide to stop paying, because I increased their rent or billed back their utilities. It would only take one or two tenants to stop paying or move out before you end up in the red on a 10-unit property…

      Reply
        Susan Lassiter-Lyons

        It’s an expense so it does impact the NOI. Going in we look for a minimum of $50/per door per month in the spread so it’s usually OK. As a real estate investor, being scared “sh*tless” about evictions isn’t very useful. It’s part of the business.

        Reply
Josh

Hi Susan, Great strategy to break into multifamily investing, especially for a newbie like myself.

From Bill’s 10 unit example from above at $50 per door = $500 and he pays a management company to manage the property. Does he net the cash after paying the management company(included in your expenses)? If you could explain that piece, it would be much appreciated! Thanks

Reply
    Susan Lassiter-Lyons

    Hi Josh, the management fee is included in the expense so his $50/door goal is net to him.

    Reply
    Bill

    Josh, as Susan said, the $50/door is net. The property has to pay for itself (and that includes PM fees) and net me $50/door cash flow in the first 30 – 60 days or I don’t do the deal. And that $50/door is the MINIMUM. After I’ve had the property and have been able to implement some of the strategies Susan is going to share on how to raise revenues my cash flow/door will be higher.

    Reply
Keith Mace

Susan, this is a great strategy to investing in MFU’s without the FULL liability of ownership.

Like Tony, I’m wondering how do you determine how much the MLO deposit will be AND how can one get the $$ for that if one doesn’t have it?

What’s the liability in an MLO IF, BY CHANCE, you flop and either don’t increase the cash flow and/or the cash flow decreases?(In other words, can one ‘get out of’ the MLO?)

I imagine since we’re only the master tenant that the owner idea the oneresponsible for paying the taxes, insurance, utilities and such; or no? If it’s the owner, how do we know they’re paying those items?

Cap rate: I’ve read Dave Lindahl’s books on Investing in multi families and even he’s not clear on how cap rate is determined. HOW IS the cap rate determined on any particular commercial property? Additionally, if one buys below a 10 cap (maybe even a 9 cap) it seems like that’s too high of a price to pay…like paying practically full value. Don’t most investors buy at less than full value?

Lastly, for now, how do you find investors who’ll buy the property once you’ve increased the cash flow and you’re ready to sell?

Reply
    Susan Lassiter-Lyons

    Thanks Keith.

    I don’t do MLO deposits. If you don’t succeed, you don’t have to exercise your option and depending on how the master lease is worded, you can either renegotiate the NOI paid to the owner or cancel the master lease with no repercussion.

    You manage the day to day so you – or preferably your property manager – handles the bills. That’s how you ensure they are paid – stay on top of it.

    This is a great article on CAP rate. I agree, a market CAP can be subjective. http://www.ccim.com/cire-magazine/articles/cap-rate-calculations

    Most investors do buy at less than full value. But in the case of MLO, you are not buying the property now. You are optioning it for the CURRENT value. The whole play is that you will increase the value thereby increasing equity and when you DO buy, buy under market value.

    There’s price or terms. If you have cash, buy on price. If we are using a creative strategy, it’s terms.

    Buyers are everywhere. Work with a local broker that specializes in that asset class is the best way.

    Reply
      Keith Mace

      Thanks you, Susan. I appreciate your answers in your reply.

      Reply
      Keith Mace

      Oh…and the cap rate article? Wow! As it was less head-spinning the 2nd time reading it….Lets just say I’ll be reading that one again.
      AND…I’m glad that Akerson’s Format was noted as “Ellwood Without Algebra”!! Makes it a lot easier. =)
      It did, however, bring more clarity to my mind on cap rates. Thanks!

      Reply

Commercial Property

Reply
    Tony

    How much do you usually pay the seller to start the master lease option

    Reply
      Susan Lassiter-Lyons

      Tony, nada. Nothing.

      Reply
    Susan Lassiter-Lyons

    Yes. 🙂

    Reply
Steven Daley

Susan, great information, I really want to break in to investing with multifamily and this might be the niche market that can actually get things moving for me. Thank you and keep teaching.

Reply
    Susan Lassiter-Lyons

    Thanks Steven! This will be great way for you to break into multifamily.

    Reply
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